Transcript: George Soros interview
Published: October 23 2009 23:32 | Last updated: October 23 2009 23:32
Chrystia Freeland, US managing editor,interviewed George Soros
,the fund manager, about the stateof the world economy, relations between the US and China, his investment performance and regulatingbankers’ compensation. This is a transcript of that interview.
PART 1: The world economy and currenciesFT: Thank you for joining us, Mr Soros.GS: It’s a pleasure.FT: How do you judge the state of the world economy? Has the world recovered from the crisis of 2007/2008?GS: Well, certainly the financial markets have regained their composure so they’re beginning tofunction again, and also the world economy has overcome the shock that it has suffered because for awhile everything froze and now things are moving again. So there is rebound, but I think that the factsof the crisis will take a long time for the world to absorb and the main source of the problem is in theUnited States. This is where consumers have spent more than they earned for a period of 25 years;where we have accumulated current account deficit that reached 6.5 per cent at its peak, which actuallycould have continued because there were other countries – particularly China and the Asian tigers –that were very happy to run a continuous surplus and to finance our deficit. So that could have actuallycontinued, but the households became over-indebted and it’s the consumer who accounts for over 70per cent of the US economy that has to cut down, and that will take a while.Then also you’ve got the banking system that basically was bankrupted. It’s at the bottom and has toearn its way out of a hole and, again, it’s happening at a pretty fast clip because banks borrow at zeroand buy 10-year government bonds, yielding 3.5 per cent, and that’s a pretty fast rate of earnings for norisk. So, they’ll earn their way out of a hole, but it will also take time. And then there’s still the wholearea of commercial real estate, where the losses have not been recognised. So the source of weaknessin the world will be mainly in the US consumer spending and in, let’s say, the decline in the bankingsector.FT: And is that weakness in the US sufficiently grave that there could be a W-shaped recovery, thatthere could be another dip downwards?GS: Well, I think certainly there could be another dip in the stock market because, right now we areenjoying the confidence multiplier and there’s a sort of a hope that this is a crisis like the previous onesand we will just sort of recover in a V-shape recovery. So, when that hope is not fulfilled, I think thatwill be ...FT: Which you are certain it will not be fulfilled?GS: Well, I can’t see it being fulfilled. I may be wrong. I’ve been wrong before, but I just don’t seewhere the growth in the US economy can come from.FT: Given this continued weakness in the US economy, are people right to start to be concerned aboutthe dollar?GS: Well, they are of course and the dollar is a very weak currency except for all the others. So there isa general lack of confidence in currencies and a move away from currencies into real assets. TheChinese are continuing to run a big trade surplus and they’re still accumulating assets and basically therenminbi is permanently undervalued because it’s tied to the dollar. There is a diversification fromassets that are normally held by central banks into other assets, especially in the area of commodities.
So there is a push in gold, there’s a strength in oil, and that is in a way a flight from currencies.FT: Is there going to be a tipping point, a moment at which the dollar is fatally weakened? Or does it just sort of carry on?GS: As long as the renminbi is tied to the dollar, I don’t see how the decline in the dollar can go toofar. Now, of course, to some extent it’s very helpful because with the US consumers saving more andspending less, exports can be way for the US economy to be balanced. So, an orderly decline of thedollar is actually desirable.FT: Does it, at some point, need also to decline against the renminbi? Does there need to be some sortof a new global currency deal?GS: No. I believe that basically the system is broken and needs to be reconstituted. We cannot afford tohave the kind of chronic and mounting imbalances in international finance. So, you need a newcurrency system and actually the special drawing rights do give you the makings of a system and Ithink it’s ill-considered on the part of the United States to resist the wider use of special drawing rights.They could be very, very useful now when you have a global shortfall of demand. You could actuallyinternationally create currency through special drawing rights and we’ve done it. We issued $250bnand that’s a very, very useful step, except the rich countries don’t actually need the additional reserves,so all they can do is put it in the shop window and say, we have got that much extra. But they can’tactually use it. Now I think it could be used to provide global public goods. The rich countries couldput their allocations in escrow. The problem is that there is a cost to using SDRs. It’s a very small costat the moment; it’s less than 0.5 per cent, but still is a cost, so somebody has to pay it and I think wehave actually the means to do it because the IMF has very large gold reserves – kept in the books at avery low price – and it has been decided to use those gold reserves to the benefit of the least developedcountries. So, the IMF could actually pick up the cost of paying for the special drawing rights ...FT: Using its gold reserves?GS: And, in fact, it’s being done. It hasn’t had any publicity, but I understand that in Istanbul a dealwas signed where I think the UK and France actually transferred $2bn of their SDRs, or 2bn SDRworth to the least developed countries, and the IMF picks up the cost. So, it’s a road that’s alreadybeing used and it could be used on a larger scale.FT: What sort of a financial deal should Obama be seeking to strike when he travels to China nextmonth?GS: I think this would be time because you really need to bring China into the creation of a new worldorder, a financial world order. They are kind of reluctant members of the IMF. They play along, butthey don’t make much of a contribution because it’s not their institution. Their share is notcommensurate ... their voting rights are not commensurate to their weight, so I think you need a newworld order that China has to be part of the process of creating it and they have to buy in. They have toown it the same way as, let’s say, the United States owns the Washington consensus, the current order,and I think this would be a more stable one where you would have co-ordinated policies. I think themakings of it are already there because the G20, in agreeing to peer reviews, effectively is moving inthat direction.FT: Do you think it’s possible to persuade China to allow the renminbi to become stronger?GS: I think that they would be ... they’ve been advocating for it, so I would take them at their word anduse this as a special drawing rights more often and make the renminbi, even though it’s not convertible,part of the SDR. In other words, it should be one of the currencies used in the special drawing rightarrangement, and that will bring them in.FT: And that’s possible even with the renminbi not being convertible?
GS: Yes. Yes. It has been considered before and I think the Brazilian real should also be part of it. Ithink that a number of currencies which constitute a basket can be and should be increased.FT: And what about the American concern that aiding and abetting this move away from the dollar asthe world’s reserve currency ultimately means a weakening of the US economy?GS: No. I think that is ... I mean, we did have great benefits from it, but we have abused it and I don’tthink we can continue abusing it anyhow. So it is not necessarily in our interests to have the dollar asthe sole world currency because as the world economy grows, it needs an additional currency and, if the dollar is that additional currency, it means that the US has to have chronic current account deficit.And that is not appropriate. I think it’s in our interests as well to reform the system.FT: At least in the short-term, though, isn’t it very convenient for America that the rest of the world isunderwriting American spending right now?GS: Yes, it is, but the willingness to do so is greatly diminished. I think that you will find thateffectively China will buy less and less of the US government bonds because it will have a smallersurplus for the United States because China will be diversifying. It will be lending to Brazil and SouthAfrica and other countries in order to finance its exports to those countries. So I think this is a healthy,if painful, adjustment that the world has to go through.FT: If America doesn’t actively take part in this sort of renegotiation of global finance, what willhappen? What’s your nightmare scenario?GS: Well, the Chinese will go bilateral. They already do it. They already have a clearing arrangementwith Argentina and I think they’re working on one with Brazil, and you will find that there will bemore and more bilateral arrangements. So the dollar will remain the main international currency, but itsuse will decline. So I think that a world of bilateral relations is less desirable than a continuation of amultilateral system. But the system we have now has actually broken down, only we haven’t quiterecognised it and so you need to create a new one and this is the time to do it.FT: In the United States, how worried are you about the budget deficit and maybe about the possibilityof inflation?GS: Well, certainly a decline in the value of the dollar is necessary in order compensate for the fact thatthe US economy will remain rather weak, will be a drag on the global economy. China will emerge asthe motor replacing the US consumer and, of course, it’s a smaller motor because the Chinese economyis much smaller. So the world economy will have less of a motor, so it will move forward slower thanit has in the last 25 years. But China will be the engine driving it forward and the US will be actually adrag that’s being pulled along through a gradual decline in the value of the dollar.FT: And, domestically, what about inflation? Is that something that you’re worried about?GS: Well, it could be if lending restarts and the balance sheet of the Federal Reserve is not shrunk commensurately, but I think this is something ... it’s a delicate manoeuvre, but I think it can be done.So there would be a slow decline in the value of the dollar, a managed decline, and that would be theadjustment that needs to be accomplished. Now it could actually get out of hand and certainly the fearof inflation will precede inflation itself and actually the fear of inflation in the markets – let’s say,driving up interest rates – could then forestall the inflation and push the economy back into a recession.So you would have stop/go kind of economy which is similar to the ‘70s.FT: How worried are you about the Fed taking maybe a more hawkish position in raising interest ratespossibly too soon?GS: It’s unlikely to do it because they have the Japanese example in front of them and they see that theJapanese did it a few times and it has actually set them back. So, 25 years of excesses have to beworked off .
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